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Jimmy Carr, small business and tax avoidance

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Thursday June 21, 2012 at 1:32pm
The reality of tax avoidance for many small business owners is very different to the headline hitting experience of Jimmy Carr.

Owning and running a business is tough. I say this from a lifetime of working with business owners. Even the good times are not immediately obvious, it is only by comparing them to the really hard times you realise things are not so bad.

Small business faces huge competition, that’s the way a capitalist society works. We do not have professions sheltered from competition by protectionist regulation, inefficient trade and working practices or massive state assistance to a failing industry. We are not like France where setting up in business is very difficult, in the UK anyone can “just do it” very easily and at very low cost. Because it is so easy to start a business most markets are already saturated with others doing the same.

In the UK the competition is relentless, margins are tight and many businesses operate on a knife edge of success or failure. Now all of this comes at significant cost to the entrepreneur business owner. They have to acquire new skills such as marketing, finance and people management. Business owners and entrepreneurs also invest huge personal resources such as life savings or equity from home ownership, all for the desire to create and build a business.

Now, if one of our clients runs out of money they will go into liquidation, there is no safety net, their life savings or home equity is gone and they are left with nothing. They take the often massive risks with the hope of future rewards as the business builds and they hope thrives. For many business owners rewards can be meagre.

As the business grows more needs to be invested to fund working capital. If money is borrowed, personal guarantees are required thus committing the business owner to more personal financial risk. At the same time the business is employing people and paying income tax and national insurance to HMRC.

Cash is king in business. The only place the cash needed to fund growth and repay personal debt can come from is by extracting profits from the business. But tax on these profits can be as high as 66% thus leaving only 34% left to extract.

Needless to say many business owners will rather implement a legal tax strategy and use the tax saved to invest in the business or repay personal borrowings. Their business is usually their life’s work. HMRC is the revenue collection side of a government and has no interest whatsoever in the business owner's struggle to keep growing and repay the debt.

Now I don’t know the details of the Jimmy Carr case that’s hit the headlines over the last few days, but I do know that the situation for many small business owners is difficult, and paying personal tax at a rate of 66% makes it even more so. Whilst there are legal tax saving strategies out there we will continue to talk to our clients about them. After all it’s our job to help our clients, and their business thrive, not just survive in these tough times.

Andy Parker
Chartered Accountant Birmingham

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Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here